Picture the world at war
in 1944. All of Europe, except for Switzerland, is pounding its infrastructure,
manufacEagleTraders.comg base and population into rubble and death. Asia is locked
into a monumental straggle which is destroying Japan, China, and the Pacific
Rim countries. North Africa, the Baltic's, and the Mediterranean countries
are clutched in a life and death struggle in the fight to throw off the
yoke of occupation. A world gone mad! Economic destruction, mad, human
misery and dislocation exists on a scale never before experienced in human
history. What went wrong? How could the world rebuild and recover from
such devastation? How could another war be avoided?

This was the world as it
existed in July 1944 when a relatively small group of 130 of the western
worlds most accomplished economic, social and political minds met in upstate
New Hampshire at a small vacation town called Bretton Woods. John Maynard
Keynes, the man who had predicted the current catastrophe in his book,
The Economic Consequences of the Peace, written in 1920, was about to
become the principal architect of the post-World War II reconstruction
Keynes presented a rather radical plan to rebuild the worlds economy,
and hopefully avoid a third world war. This time the world listened, for
Keynes and his supporters were the only ones who had a plan that in any
way seemed grand enough in foresight and scope to have a chance at being
successful. Yet Keynes had to fight hard to convince those rooted in conventional
economic theories and partisan political doctrines to adopt his proposals.
In the end, Keynes was able to sell about two-thirds of his proposals
through sheer force of will and the support of the United States Secretary
of the Treasury, Harry Dexter White.

At the hart of Keynes proposals
were two basic principals: first the Allies must rebuild the Axis Countries,
not exploit them as had been done after WW 1; second, a new international
monetary system must be established, headed by a strong international
banking system and a common world currency not tied to a gold standard.

Keynes went on to reason
that Europe and Asia were in complete economic devastation with their
means of production seriously crippled, their trade economies destroyed
and their treasuries in deep dept. If the world economy was to emerge
from its current state, it obviously needed to expand. This expansion
would be limited if paper currency were still anchored to gold.

The United States, Canada,
Switzerland and Australia were the only industrialized western countries
to have their economies, banking systems and treasuries intact and fully
operational. The enormous issue at the Bretton Woods Convention in 1944
was how to completely rebuild the European and Asian economies on a sufficiently
solid basis to foster the establishment of stable, prosperous pro-democratic
governments.

At the time, the majority
of the world's gold supply, hence its wealth, was concentrated in the
hands of the United States, Switzerland and Canada. A system had to be
established to democratize trade and wealth; and redistribute, or recycle,
currency from strong trade surplus countries back into countries with
weak or negative trade surpluses. Otherwise, the majority of the world's
wealth would remain concentrated in the hands of a few nations while the
rest of the world would remain in poverty.

Keynes and White proposed
that the United States supported by Canada and Switzerland would become
the banker to the world, and the U.S. Dollar would replace the pound sterling
as the the medium of international trade. He also suggested that the dollar's
value be tied to the good faith and credit of the U.S. Government not
to gold or silver, as had traditionally been the support for a nation's
currency.

Keynes concept of how to
accomplish all of this was radical for its time, but was based upon the
centuries old framework of import/export finance. This form of finance
was used to support certain sectors of international commerce which did
not use gold as collateral, but rather their own good faith and credit,
backed by letters of credit, avals, or guarantees.

Keynes reasoned that even
if his plans to rebuild the world's economy were adopted at the Bretton
Woods Convention, remaining on a Gold standard would seriously restrict
the flexibility of governments to increase the money supply. The rate
of increase of currency would not be sufficient to insure the continued
successful expansion of international commerce over the long term. This
condition could lead to a severe economic crisis, which, in turn, could
even lead to another world war. However, the economic ministers and politicians
present at the convention feared loss of control over their own national
economies, as well as, run-away inflation, unless a "hard-currency"
standard were adopted.

The Convention accepted Keynes'
basic economic plan, but opted for a gold-backed currency as a standard
of exchange. The "official" price of gold was set at its pre-WW
II level of $ 35.00 per ounce One U.S. Dollar would purchase 1/35 an ounce
of gold. The U.S. dollar would become the standard world currency, and
the value of all other currencies in the western. non-communist world
would be tied to the U.S. dollar as the medium of exchange.

The Bretton Woods Convention
produced the Marshall Plan, the Bank for Reconstruction and development
known as the World Bank. the International Monetary Fund (IMF) and the
Bank of International Settlements (BIS). These four would re-establish
and revitalize the economies of the western nations. The World Bank would
borrow from rich nations and lend to poorer nations. The IMF working closely
with the World Bank, with a pool of funds, controlled by a board of governors.
would initiate currency adjustments and maintain the exchange rates among
national currencies within defined limits. The Bank of International Settlements
would then function as a "central bank" to the world.

The International Monetary
Fund was to be a lender to the central bank of countries which were experiencing
a deficit in the balance of payments. By lending money to that country's
central bank, the IMF provided currency, allowing the underdeveloped country
to continue in business. building up is export base until it achieved
a positive balance of payments. Then, that nation's central bank could
repay the money borrowed from the lMF, with a small amount of interest
and continue on its own as an economically viable nation. If the country
experienced an economic contraction, the IMF would be standing ready to
make another loan to carry it through.

The Bank of International
Settlements (BIS) was created as a new central bank to the central banks
of each nation. It was organized along the lines of the U.S. Federal Reserve
System and it's principally responsible for the orderly settlement of
transactions among the central banks of individual countries. In addition,
it sets standards for capital adequacy among the central banks and coordinates
the orderly distribution of a sufficient supply of currency in circulation
necessary to support international trade and commerce.

The Bank of International
Settlements is controlled by the Basel Committee which is comprised of
ministers sent from each of the G-10 nations central banks. It has been
traditional for the individual ministers appointed to the Basel Committee
to be the equivalent of the New York "Fed's" chairperson controlling
the open market desk.

The World Bank, organized
along more traditional commercial banking lines was formed to be lender
to the world" initially to rebuild the infrastructure, manufacEagleTraders.comg
and service sectors of the European and Asian Economies, and ultimately
to support the development of Third World nations and their economies.
The depositors to the World Bank are nations rather than individuals.
However, the Bank's economic "ripple system" uses the same general
banking principles that have proven effective over centuries.

The directors of both banks
are controlled by the ministers from each of the G-10 countries: Belgium,
Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland,
the United Kingdom and Luxembourg.

By 1961, the plans adopted
at the Bretton Woods convention of 1947 were succeeding beyond anyone's
expectation. Proving that Keynes was right. Unfortunately, Keynes was
also right in his prediction of a world monetary crisis. It was brought
on by a lack of sufficient currency (U.S. dollars) in world circulation
to support rapidly expanding international commerce. The solution to this
crisis lay in the hands of the Kennedy Administration, the U.S. Federal
Reserve Bank and the Bank of International Settlements. The world needed
more U.S. Dollars to facilitate trade. The U.S. was faced with a dwindling
gold supply to back such additional dollars. Printing more dollars would
violate the gold standard established by the Bretton Woods agreements.
To break the treaty would potentially destroy the stable core at the center
of the worlds economy, leading to international discord, trade wars, lack
of trust and possibly to outright war. The crises was further aggravated
by the belief that the majority of the dollars then in circulation was
not concentrated in the coffers of sovereign governments, but rather in
the vaults or treasuries of private banks, multinational corporations,
private businesses and individual personal bank accounts. A mere agreement
or directive issued by governments among themselves would not prevent
the looming crisis. Some mechanism was needed to encourage the private
sector to willingly exchange their U.S. Dollar currency holdings for some
other form of money.

The problem was solved by
using the framework of a forfait finance; a method used to underwrite
certain import/export transactions which relies upon the guarantee or
aval (a form of guarantee under Napoleonic law) issued by a major bank
in the form of either documentary or standby letters of credit or bills
of exchange which are then used to assure an exporter of future payment
for the goods or services provided to an importer. The system was well
established and understood by private banks, government and the business
community world wide. The documents used in such financing were standardized
and controlled by international accord, administered by the members of
the International Chamber of Commerce (ICC) headquartered in Paris. There
would be no need to create another world agency to monitor the system
if already approved and readily available documentation, laws and procedure
provided by the ICC were adopted. The International Chamber of Commerce
is a private, non-governmental, worldwide organization, that has evolved
over time into a well recognized organized, respected and, most of all,
trusted association. Its members include the worlds major banks, importers,
exporters, merchants, and retailers who subscribe to well-defined conventions,
bylaws, and codes of conduct over time, the ICC has hammered out pre-approved
documentation and procedures to promote and settle international commercial
transactions.

In the ICC and forfeit systems
lay the seeds of a resolution to the looming crisis. Recycling the current
number of dollars back into world commerce would solve the problem by
avoiding the printing of more U.S. dollars and would leave the Bretton
Woods Agreement intact. If currency, dollars, could be drawn back into
circulation through the private international banking system and redistributed
through the well known "bank ripple effect", no new dollars
would need to be printed, and the world would have an adequate currency
supply. The private international banking system required an investment
vehicle which could be used to access dollar accounts, thereby recycling
substantial dollar deposits. This vehicle would have to be viewed by the
private market to be so secure and safe that it would be comparable with
U.S. Treasuries which had a reputation for instant liquidity and safety.
Given the "newness" of whatever instrument might be created,
the private sector would prefer to exchange their dollars for a "proven"
instrument (United States Treasuries) but selling new Treasury issues
would not solve the problem. In fact, it would exacerbate the looming
crisis by taking more dollars out of circulation. The World needed more
dollars in circulation.

The answer was to encourage
the most respected and creditworthy of the world's private banks to issue
a financial instrument guaranteed by the full faith and credit of the
issuing bank, with the support from the central banks, lMF and Bank of
International Settlements. The worlds private investment and business
sector would view new investments issued in this manner as "safe".
To encourage their purchase over Treasuries, the investor yield on the
new issues would have to be superior to the yield on Treasuries. If the
instruments could be viewed as both safe and providing superior yields
over Treasuries, the private sector would purchase these instruments without
hesitation.

The crisis was prevented
by encouraging the international private banking sector to issue letters
of credit and bank guarantees, in large denominations, at yields superior
to U.S. Treasuries. To offset the increased "cows" to the issuing
banks, due to the higher yields accompanying these bank instruments, banking
regulations within the countries involved were modified in such a way
as to encourage and or allow the following:

Reduced reserve requirements
via off-shore transactions.

Support of the program
by the central banks. World Bank, IMF and Bank of International Settlements.

Off-balance sheet accounting
by the banks involved.

Instruments to be legally
ranked "para passu" (on the same level) with depositors
funds.

The banks obtaining these
depositor funds would be allowed to leverage these funds with-the
applicable central bank of the country of domicile in such a way as
to obtain the equivalent of federal funds at a much lower cost. When
these "leveraged funds'" are blended with all other accessed
funds, the overall blended rate cost of funds to the issuing bank
is substantially diminished, thus offsetting the high yield given
to attract the investor with substantial funds to deposit.

The bank instruments offered
to investors were sold in large denominations often $100 million through
a well established and very efficient market mechanism, substantially
reducing the cost of accessing the funds, The reduced costs offset the
higher yields paid by the issuing banks.

Major commercial banks soon
came to realize that these instruments could serve as more than a "funds
recycling and redistribution tool", as originally envisioned. For
the issuing bank, they could provide a the means of resolving two of the
bankers major problems: interest rate risks over the term of the loan,
and disinterthediation of depositor funds. Bankers, now for the first
time, had available a reliable method of accessing large amounts of money
in a very cost efficient manner. These funds could be held as deposits
at a predetermined cost over a specific period of time. This new system
to promote currency redistribution had also given private banks a way
to pass on to third parties the interest rate and disinterthediation risks
formerly borne by the bank.

The use of these instruments
providing instant liquidity and safety has worked amazingly well since
1961. It is one of the principal factors which has served to prevent another
financial crisis in the world economies.

In recent years, smaller
banks not ranked among the top 100 have been issuing their own instruments.
Considering the dollars volume and the number of instruments issued daily,
the system has worked extremely well. There have been few instances where
a major bank has had financial problem. In all cases, the central bank
of the G-10 country concerned and the Bank of International Settlements
have moved quickly to financially stabilize the bank, insuring its ability
to honor its commitments. Funds invested in these instruments rank para
passu with depositors accounts, and as such, their integrity and protection
is considered by all the institutions involved as fundamental to a sound
international banking system.

The bank instruments program
designed under the Kennedy Administration is still used very effectively
to assist in recycling and redistributing currency to meet the worlds
demand for commerce.

Another significant change
of the Bretton Woods Agreement came in 1971, when the volume of world
trade using U.S. dollars as the medium of exchange,. finally exceeded
the ability of the United States to support its currency with gold. The
restraints of the gold standard at $35 per ounce established under the
Bretton Woods Agreements placed the United States in a very precarious
position. As Keynes had predicted, there was not enough gold in the U.S.
Treasury to back the actual number of U.S. dollars then in circulation.
In fact, the treasury was not really sure how many paper dollars actually
were in circulation. What they did how, however, was that there was not
enough gold in Fort Knox to back them. The problem was that the U.S. Treasury
was not the only institution aware of this fact. All G-10 countries were
aware of this. If demand were placed upon the U.S. Treasury at any one
time to exchange all the Eurodollars for gold, the U S. Treasury would
have had to default, thereby effectively bankrupting the United States
government.

France, the United Kingdom,
Germany and Japan were concerned about their substantial holdings in U.S.
dollars. If just one of these countries demanded gold for dollars. Then
a meeting between ambassadors to the U.S took place with Connelly ,who
was then Secretary of the U.S. Treasury, and Undersecretary of the Treasury,
Paul Volker. Connelly listened to the ambassador and said, " I will
answer you tomorrow".

Nixon, Connolly and Volker,
in an ultra-secret weekend meeting with the brightest of the nation's
bankers and economists gathered to ponder "tomorrow's" answer.
Honoring the demand meant certain death to the U.S. as an economic super
power. Not meeting the demand would have catastrophic results. Was there
a way out? What if the U.S. unilaterally abandoned the gold standard and
let its currency float in the market? Nixon and his advisors viewed the
dilemma in terms of two mutually-exclusive alternatives: increasing the
value of U.S. gold reserves and maintaining a gold-backed economy, or
considering the repercussions to the worlds economies if the U.S. dollar
were no longer backed by gold.

To resolve the crisis, the
U.S. needed to unilaterally abandon efforts to maintain the official price
of gold at an artificial level of $35 per ounce the same price that existed
in 1933. Gold in 1971 had a market value of approximately $350 to $400
per ounce in the commercial world market, or about 10 times the official
price. By letting gold seek its market price, the U.S. Treasury's gold
would automatically become worth approximately 10 times its value at the
official price. Under these circumstances, any government bank or private
investor would have to exchange $350 to $400 U.S. dollars for an ounce
of gold at the market price rather than one U.S. dollar to acquire 1/35th
of an ounce of gold at the old official price. An ounce of gold would
rise in exchange value by a factor of ten, and the U.S. Treasury's gold
supply would increase correspondingly.

In addition, once the gold
standard established at Bretton Woods at $35 per ounce was abandoned,
why reestablish it at $350 an ounce? The same problem would eventually
arise again, and Keynes would be right again. Why not adopt Keynes' original
idea of a currency, being backed by the good faith and credit of its government,
its people, the national resources and its production capacity? The United
States needed to let its currency "float" in value against all
other world currencies and not tie it to gold. Market forces would set
the dollar's value through its exchange rate with other foreign currencies.
Nixon and his advisors also realized that business world-wide had long
ceased conducting international trade through gold and silver exchanges.
Therefore, taking the dollar off the gold standard and allowing its value
to float in relation to other world currencies would create currency risks
for international trade transactions, but it would not preclude or stall
international commerce. The world of international business had, in practice,
already abandoned the gold standard years before, considering it cumbersome
and unworkable. Moreover, the other Western nations had neither the economic
nor military power to force the U.S. to honor its commitment to the gold
standard and, therefore, could not prevent it from abandoning the standard.

Based upon a clear understanding
of these two interrelated realities. Nixon and his advisors determined
to abandon the gold standard and allow the U.S. dollar to "float"
in relation to other nations' currency. The exchange rate would no longer
be determined by an artificially-maintained gold standard, but rather
by the value placed on each currency in the foreign exchange market

The system for controlling
currency supply, established by the Kennedy Administration, became an
indispensable tool to the Nixon administration. The IMF and the Bank of
International Settlements insured that the U.S. dollar would hold its
value in the international market and was recycled from countries with
a positive balance of payments back into the world economy. The illusion
of U.S. dollar backed by gold was gone.

The preceding information
explains the use of bank instruments as an alternative investment vehicle
to United States government notes, and how and why the process of issuing
bank instruments used in trading programs began and continues today.

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